‘Zombie mortgages’ come back to haunt thousands of homeowners now facing foreclosure

Thousands of homeowners face the risk of losing their homes due to “zombie mortgages” bought by companies — with some forcing foreclosures without their knowledge, according to a shocking report..

Many of the stunned homeowners took out second mortgages during the subprime lending housing bubble between 2004 and 2008 that they believed were written off — only to learn the mortgages have come back to haunt them.

An investigation by NPR found at least 10,000 old second mortgages that foreclosure activity had been initiated on in just the last two years.  

‘The numbers to me are very scary,’ Andrea Bopp Stark, an attorney at the National Consumer Law Center, told the outlet.

The problem is feared to be widespread across America. 

‘If you’re looking at the number of these foreclosure filings, or at least the attempts to collect on this zombie debt, you’re starting to see the numbers tick up dramatically into the thousands, if not more, in individual jurisdictions,’ David Weber, a professor at the Creighton University School of Law told The New York Times. 

‘That’s a lot of activity.’

Two years ago, a Massachusetts nurse walked out her front door on a spring morning to find 20 cars parked near her Quincy house with the intention of selling her home, NPR reported.

“I just had this feeling like something really bad had happened … like maybe somebody in the neighborhood died,” McDonough told NPR.

When she approached one of the individuals who had driven up to her home, she was told: “We’re selling your house.”

“This is a foreclosure. You are going to lose this house.”

McDonough was stunned. She had owned the home for 17 years and was up on her mortgage payments.

But their was a “zombie” mortgage on her home that she was not aware of.

She purchased the home in 2005 for $365,000 with an “80/20” loan. One mortgage covered 80% of the home’s cost — $292,000 — while the other covered the remaining 20% — equal to $73,000.

“It was the easiest thing I’ve ever applied for,” McDonough told NPR. “I just filled out paperwork and submitted it and I was approved.”

McDonough was making her mortgage payments in the first two years, but the interest shot up after the second year — pushing her monthly bill $700 higher.

When she asked for the mortgage to be modified, she said she was informed by the company, which serviced both loans, that the second mortgage was forgiven.

“I was actually in my kitchen. I was cooking dinner, and I was talking to a representative … and he told me I would never have to make a payment again on the second mortgage,” she said.

“And I just didn’t question any of it ’cause I was so grateful that the loan was modified.”

McDonough said she no longer was receiving statements on the 20% loan. But recently she started getting phone calls asking for money.

Assuming those phone calls were scams, she ignored them.

The then received a letter was from First American National, a company that she had never heard of.

“It had an amount and they wanted a payment … like $77,000,” she said. “I was kind of in disbelief.”

First American National then kept calling and threatening her with foreclosure if she didn’t pay, McDonough told NPR.

When McDonough called the company that serviced the first mortgage, she said she was told it was likely a scam.

“I was crying on the phone with them, like having a nervous breakdown,” McDonough said.

“And they kept saying like we’re gonna help you. You can’t lose your home through this.”

But her fears were well-founded.

Limited liability companies that are registered in Delaware and whose owners’ identities are shielded by law bought up bundles of mortgages for pennies on the dollar in the wake of the 2008 housing crash — when banks were selling them for dirt cheap as they were going under.

Since housing prices were low after the crash, the mortgages were worthless. But once home values soared in the ensuing years, the investors who bought up the loans were looking to cash in.

McDonough’s home, which she bought for $365,000, is now worth $600,000.

First American National bought her house at auction for $178,500 and is the legal owner of the home. McDonough, however, is still living in her home after filing a lawsuit which alleges the company used unfair and deceptive practices to foreclose on her home. 

She continues to make payments on her first mortgage.

“I feel like what happened was a terrible thing,” McDonough said.

“But I’m still, like, really hopeful that I’m going to stay in my home. I’m really hopeful I’m going to win this case.”

McDonough’s lawyers claim that the second mortgage she was told had been forgiven was instead sold in 2020 along with around 600 other mortgages to an LLC connected with First American National.

“We think that they have systemically and deliberately broken the law,” Todd Kaplan, an attorney with the nonprofit Greater Boston Legal Services, told NPR.

First American National, a small New Jersey-based business, is run by Ira Bailey, who told NPR that he had been buying up second mortgages for around 20 years.